Annuities Bullet-Proof Guarantees

The Baby Boom generation—a whopping 76 million individuals who are steadily marching through middle age and into the ranks of senior citizens are looking for secure, safe investment vehicles that provide stable income for their retirement while providing competitive returns.

With the stock market in a long-term consolidation phase, chopping up & down, but actually going sideways this past decade, frustrated investors are perplexed as to where to put their money.

Today the average investor is left sitting on the fence with their money.  In the 1990s, the perception was that the S&P 500 was the ticket to retiring rich and young, but that went out the window in 2000. 

In the early 2000s, real estate offered the get-rich-quick strategy of owning a few houses, then living in one and getting rental income from the others, but that hasn’t worked out either.

After the devastation many accounts experienced during the market crash of 2008, many investors realize that they cannot afford to take such huge risks with their retirement nest eggs. So many pre-retirees and retirees alike watched their investment account balances get cut in half during the downturn. Some retirees had to go back to work, and pre-retirees have had to delay retirement for several years.

This market experience has led many investors to seek some type of bullet proof guarantee for their investment.  With the market volatility over the last several years investors have looked for more conservative products that provide stability and growth. Those objectives can be met with the use of products like the equity indexed annuity.

Fixed annuities and equity index annuities sales are continuing to double each year as the population trend in the United States continues to age. An indexed annuity pays out a rate of return on your money that’s tied to an economic index, such as the S&P 500. It’s considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment, but can also enjoy a higher return when there are gains in the broader market.

More Interest When Stock Index Goes Up; No Loss When Index Goes Down:  “Fixed Index Annuities” help you capture more interest if market index(es) you choose go up. The interest adds to your account. It is not taken away if the stock index(es) go back down.

This is the best alternative to take advantage of increases that occur in the stock markets without taking any chance of loss if the markets go down. Periodically, you can adjust which stock market index(es) excess interest is calculated with. In that way the opportunity to still plan for market swings to gain extra interest is possible.  By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.

We know of no other investment that provides the kinds of benefits and protections annuities do. The deal you make with the annuity and insurance companies is that they will provide the increased benefits if you promise to keep the money in the contract for the agreed term.  

Annuities offer some wonderful investment and saving options in certain situations. Yet annuities come with mixed bag of pros and cons. When researching the Fixed Indexed Annuities PRO’s and CON’s there is a one con that is most usually discussed as a huge problem regarding these products: The “CON” is stated as such:

The problem is that a contract’s crediting method—the formula that determines how much the investor earns—can change each year at the whim of the issuer. Over 95% of index annuity sales are in products that may change at least one element of their interest crediting methodology after each reset period.

The ultimate determining factor in setting index participation in future years is not the interest rate environment or the cost of options, it is what carrier management decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any returns ultimately subjective.

Unless I misread the product, it seems reasonable to wonder why any advisor or trusted agent would advise a truly risk-averse investor—the target market for FIAs—to invest in something so unpredictable.  End Quote!

Is this true?  What would happen if we said the same argument comparing another product: “Home Ownership”:

In researching the PRO’s and CON’s of Home Ownership and have come to the conclusion that there is a one huge problem regarding these products:

The problem is that a home’s property tax method—the formula that determines how much the investor pays—can change each year at the whim of the Government. Over 95% of Home sales are in counties that may change at least one element of their tax methodology after each reset period.

The ultimate determining factor in setting taxes in future years is not the interest rate environment or the cost of the home, it is what the Government decides to do. This human element introduces a random variable that cannot be quantified, thereby making any attempt to project any future taxes ultimately subjective.

Unless I misread the tax code, it seems reasonable to wonder why any advisor or trusted real estate agent would advise any American—the target market for Home Ownership—to invest in something so unpredictable.

This argument can be used with all products not just annuities.  However the answer to the “CON”?  Fixed Indexed Annuities? Why? Because annuities is the best alternative and you can Bullet-Proof your retirement better than any other financial product offers.  

How do Annuites Bullet-Proof your investments? 

You do not invest in a fixed annuity. You pay a premium for its insurance protection. That protection is a minimum guaranteed interest rate and at least one guaranteed lifetime income option. Without question, the guarantees are valuable – arguably more so now than ever before, which is why there is an explicit internal charge for them. This charge is used to operate a comprehensive risk management program which ensures that the product provider is able to meet the guarantees.

Index crediting is how the company determines excess interest above and beyond the guaranteed rate. As for the subjective nature, you would have to look at the subjective nature of the Nation’s Federal Funds Rate. All interest rates in America are derived from this rate.

If you can guarantee what the Chairman of the Fed will do, Insurance companies could easily guarantee how they would respond. Without that crystal ball, the companies must have a device to change rates when the Fed changes rates.

After all, the index really has nothing to do with Index annuities since ZERO dollars are actually invested in the index. The Federal Funds Rate has everything to do with the adjustments because it drastically changes the reserve requirements imposed by our government.

Insurance Companies can protect you from just about any Peril they can calculate. Unfortunately, the subjective nature of the government and those that vote our representatives into office are not a covered peril!!

Insurance and annuity companies have been updating annuity designs to meet modern needs. Annuities continue to be safe while offering greater opportunity to earn and collect interest.  “Safety and Security” is built into Annuities. Mutual funds, bonds or stocks do not offer the same protections.

Modern annuities provide great security for investment. State insurance commissioners regulate annuities and testify to their security.  One of the most fundamental laws of economics – with reduced risk, there must be reduced expected returns.

Annuities are a financial product that has many lucrative offers, not only a – promising yield, but huge additional benefits and conditions that work to guarantee your investment –”PRO’s”.

• Annuities Require Reserves to Meet Obligations: State rules make the companies and their products very safe. The companies keep required reserves set aside to meet obligations.  They are audited to assure compliance with those rules. If a company were to go under, procedures have other companies take on the obligations to you so you do not lose your money in annuities.
• Annuities Have Suitability Requirements: States require annuities be sold only to people for whom they are suitable in the first place. The insurance regulators require completion of a specific form that gives the information to decide if it is a suitable investment for you. This means you get further help to evaluate the annuity contract and greater assurance it works for your needs and wishes.
• Annuities Provide Protection from Creditors: In some states, statutes protect money in an annuity or insurance policy from your creditors.  An Annuity is not often liable to garnishment or attachment in the favor of creditor of individual insured. That means annuity offers creditor protection.  Annuities also serve as excellent ‘asset protection tool’ in the case of bankruptcy.
• Annuities Have Income Tax Deferral: Annuity income is tax deferred.  Therefore, your interest can compound in a way that accrues more interest. Since fixed-annuity earnings are tax deferred, they are not marked on your tax-forms. This ultimately keeps your fixed-annuity investment off the tax record until you extract money. This gives you the required privacy feature.
• Annuities Does Not Increase Tax on Social Security:  Tax deferred interest in an annuity does not make that tax higher.
• Annuities Have Tax Favored Distributions:  When you take the money out of an annuity the distributions are treated in an income tax sensitive way. Only the portion of the payment that reflects interest earned on the principal gets taxed. The portion that is the return of your principal is not.
• Annuities Avoid New Health Care Surtax: Income in a non qualified annuity is not subject to the new 3.8% surtax that is part of health reform. It is investment income on which that tax is not paid.
• Annuities Bonuses on Your Premium:  Annuity companies often provide bonus additions to your interest bearing account for signing up. For example, if you deposit $100,000.00 into an annuity with a 10% bonus, the interest additions will be calculated as if you deposited $110,000.00. This increases compounding interest being accumulated in a deferred annuity; therefore, increasing your payouts down the road.
• Annuities Have Estate Benefits:  As the annuity is an agreement with a designated beneficiary, it offers two more protections after the death of primary candidate, including contestability and probate process. Contestability means no person can raise questions on your settlement as to who is going to get your fixed-annuity advantages after your death. The fixed-annuity investment moves immediately to the beneficiary, which minimizes the overall cost related with probating the money and avoids the characteristic holdup. This also keeps the money transfer private, which is another privacy feature.
• But what about “surrender penalties”?  Fixed annuities commonly offer penalty-free access of around ten percent of the purchase price annual. Also, annuity contracts waive penalties for withdrawals for expenses of terminal illness, long-term care and other reasons. Annuity contracts can be of different lengths, so “laddering” and other techniques can be used to plan and capture opportunities and assure needed liquidity is possible.

Annuities will not solve all retirees’ investment problems, but they can help alleviate some of the unnecessary strains caused by the market.

Annuities: Safe & Secure

A secure retirement is a dream of everyone who worked hard for years.  Yet after two brutal bear markets (2001-2002 and 2008-2009) retirement plan investors in 401(k) plans saw much of their lifetime retirement savings get walloped.

After the chaotic stock market of the past few years, capital preservation and sleeping well at night have trumped most other things. For investors dependent on interest payments for income, especially those near or in retirement, the current environment is challenging, to say the least.

The bottom line is that today’s retirees face greater challenges than ever, with diminishing sources of income, longevity risk and volatile markets that have eaten away much of their retirement portfolio.

Low yields mean low income, which has investors concerned about risk as they try to figure out how to augment their investment earnings without taking too big a gamble.

This doesn’t resonate if someone is trying to live off the investment income of a certain amount of principal. At 2007 rates, for example, you would have needed $1 million in government bonds to generate an income of $50,000 a year. Today, you’d need nearly twice that much.

It is often tempting to risk it all for the promise of a high return on your investment but you must remember that with great reward comes great risk and most of the time your security is simply not worth that particular risk.

You just can’t count on companies as we’ve seen big-name firms run into serious trouble in the last several years, including some big-name companies that were established nearly a century ago (Bear Stearns, Lehman Brothers, Enron, Worldcom) wind up defunct.

If you decide to delve into the realm of stock market investment you should be aware that every transaction costs money, that you need to thoroughly research the ins and outs of this type of investing, and that you are taking a substantial risk with your retirement investment.

History provides many lessons for all of us. There remains a need for retirement products that address volatility and attempt to generate consistent, absolute returns.  The idea of income planning, unlike other financial-planning concepts, is natural and comforting to many Boomers approaching retirement.

Perhaps they have gotten used to receiving two paychecks a month for 40 years or more. Remember the peace of mind that a steady income gave you during those years. Why would you want to give that up when you retire?

No amount of accumulated assets can replace the comfort created by a steady and guaranteed income for life, particularly an income that has built-in inflation hedges.

401(k) legislation was passed and rules crafted in the late 1970’s/early 1980’s. This 401(k) legislation was rooted in the belief that permitting investors to have more input on numerous aspects of their retirement savings was a good thing. 

These aspects included segregating each individual retirement account, offering the choice to save (defer) or not to save, ranges of deferral amounts, the ability to modify those deferral amounts, investment election choices, portability, loans and much more.  There were, however, no guarantees.

The “guarantee” was resurrected for retirement plan savers in the form of annuities. Unlike Bear Stearns and Lehman Brothers, the insurance industry has its own “insurance” in the event that one of the companies runs into financial difficulties and defaults.

Policyholders can rely on the insurance guarantee funds of the various states, to the extent that they are available. While this is not the same as a Federal guarantee, no state life insurance fund has ever let one of its members renege on its claims. The state funds typically get other stronger insurers to takeover the failed companies’ policies.

With CD rates at all-time lows, ultra-conservative investors are looking to annuity plans as a place to secure a higher return on their retirement nest egg.  Annuities that have guaranteed income benefits attached to them are appropriate for a large portion of the population. Additionally, the Fixed Indexed Annuity product has solved the market volatility problem.

What Does Standard & Poor’s 500 Index – S&P 500 Mean?

The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index – each stock’s weight is proportionate to its market value.

An indexed annuity pays out a rate of return on your money that’s tied to an economic index, such as the S&P 500. It’s considered a hybrid of the fixed and variable types because you receive a minimum guaranteed payment, but can also enjoy a higher return when there are gains in the broader market.

In a study conducted at Wharton School by authors Marrion, Babbel and VanDerPal’s, Real World Index Annuity Returns, shows that, based on data from 15 Fixed Indexed Annuities issuers, Indexed annuities outperformed conventional investments during much of the past 10 years —a  period when the S&P500’s cumulative return has been roughly zero.

The five-year annualized returns for indexed annuities, from 1997 through 2007, averaged 5.79%, compared to 5.39% for taxable bond funds and 4.73% for fixed annuities. From April 1995 through 2009, indexed annuities beat the S&P 500 over 67% of the time and a 50/50 mix of one-year Treasury Bills and the S&P 500 79% of the time.

Starting in 1997 through 2004, during eight five year periods, their data shows, the indexed annuities they looked at, offered an average annualized return of 4.19% to 9.19%, with no negative years. By contrast, an investor in the S&P500 would have seen four positive five-year periods and four negative ones.    

The question is how do Fixed Indexed Annuities maintain such an apparently even keel? In a bad equity markets, their substantial bond component offers downside protection. In rising equity markets, their equity option component increases in value.

Investors in Fixed Indexed Annuities therefore don’t need to fear the bears and aren’t as slavishly dependent on the bulls. Or, as the authors put it:  “By eliminating the prejudicial effects occasioned by significant stock market declines, and locking in returns annually or biannually, there is less of a need to try and capture large upside market swings to recover from the declines.”

Besides insulating investors from volatility, the-authors say, Fixed Indexed Annuities do, contrary to certain media reports, offer liquidity (penalty-free withdrawals of at least 10% a year) as well as tax-deferred compound growth.

The usual definition of safe money is money you cannot afford to lose. AnnuityNews.net defines a safe money place as one where your principal is protected from loss as long as you follow the initial guidelines, and if you do decide to take your money and leave, you know pretty much what leaving early will cost.

The opposite is a risk money place where if you decide to take your money you don’t know what you will get back. It could be more than you put in – risk money places offer the potential for much higher returns than safe money places – but it could also be less than you started with or even zero. 

Knowing how to make money, knowing what to do with money once you have it, knowing how to keep people from taking your money away from you, knowing how to keep your money for the long term, and knowing how to make your money work for you- is of vital importance in the quest to achieving financial freedom.

Annuities Stop “Silver Tsunami”

Juan was driving down a country lane in his pickup when suddenly a chicken darted into the road in front of him. He slammed on his brakes, but realized that the chicken was speeding off down the road at about 30 miles an hour.

Intrigued, he tried to follow the bird with his truck, but he couldn’t catch up to the accelerating chicken. Seeing it turn into a small farm, Juan followed it.

To his astonishment, he realized that the chicken had three legs. Looking around the small farm, he noticed that ALL of the chickens had three legs.

The farmer came out of his house, and Juan said, “Three-legged chickens? That’s astonishing!”

The farmer replied, “Yep. I bred ‘em that way because I love drumsticks.”

Juan was curious. “How does a three-legged chicken taste?”

The farmer smiled. “Dunno. Haven’t been able to catch one yet!”

Renewed economic uncertainty is testing our generation-long love affair with the stock market.  With over 33.12 billion dollars withdrawn from the domestic stock market in the first seven months of this year, reminds me of the three legged chicken, you can’t catch it.

U.S. households lost trillions of dollars in the first few quarters of the economic and financial crisis of 2007, 2008, and 2009. Total wealth relative to after-tax income had fallen to its lowest level since March 1995.

This sharp drop likely had a severe effect on the retirement income security of millions of U.S. households.  Small investors have lost their appetite for risk.  Now many have stopped chasing the three legged chicken and are choosing investments that they deem safer, such as Annuities.

The last few years have altered American’s sense of financial security and the notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that the decline in home values and in job stability has occured.

Surveys and studies regularly report how unprepared U.S. adults are for retirement. The statistics are particularly bad (and sad) for baby boomers, with a majority typically admitting that they do not have enough money left after the decline in the market to retire.

Retirement is suppose to provide freedom from the routine bounded job, but at the same time, it also introduces the fear for the future as regular income stops coming.

Adding to those fears is the third leg of the chicken, a “Silver Tsunami” is gaining force. This is tempered by another worrying problem: The Medical advances in this country is an amazing success story in that people are now living longer, many into their high 90’s.  This is called, longevity risk, or the chance that a retiree will outlive his or her savings.

Just imagine that when you are 80 years old, in reasonably good health, and you have just spent your last penny of retirement savings. You have no other sources of income. For the rest of your life, you will rely on government handouts and the charity of others.

Trying to finance your retirement with the present market risks and with the probability of a decade of a continuing underperforming market will provide less-than-anticipated retirement income for many retirees. The New York Life and Wharton Business School collaborated on a study to find the most effective way to maximize retirement income. The determination was made that fixed annuities that convert to a lifetime stream of income proved to be one of the best ways to do that. 

Annuities are considered conservative, providing the ironclad guarantees and are the perfect investment for anyone who is interested in finding a low risk investment; particularly those who have just retired and are looking for a way to protect their retirement fund from the volatility of the market. 

Annuities will provide a steady stream of income with very little risk. In addition to receiving a steady income for life, you can count on receiving allowances for withdrawal without penalties, death benefits, and probate insurance.

Compared to stock market investments, an annuity portfolio provides you with a special peace of mind, in that, unlike the stock market, you don’t have to worry about which way the market is moving. You don’t have to know when to cash in for a gain, nor do you have to know when to sell and cut your losses.

An annuity portfolio bears:

·         No administrative fees,

·         No annual maintenance fees,

·         No upkeep expenses,

·         No buy or sell expenses,

·         No personal management of assets,

·         No people on retainers to manage assets,

·         No real estate taxes,

·         No repairs,

·         No zoning commissioner or city council to contend with,

·         No storms,

·         No droughts and

·         No public liabilities

The recession is a wake-up call for many Americans and their response is an appropriate one. By preparing for and navigating an economic downturn with smart planning, they are more likely to take the actions needed to achieve financial security no matter where they are starting from.  As Baby boomers approach retirement they are shifting away from stocks and mutual funds to annuities to provide regular guaranteed income for the years when they are no longer working.

Long Term Care Insurance

Many people are confused of whether or not to get long-term care insurance. Most people think that they won’t need such insurance since they have personal savings to cover the costs, unaware of the drawbacks that could fall on their finances and lifestyle.

Here are some of the FAQs you need to know about long- term care insurance:

Who should buy long term care insurance (LTCI)?

Anyone who wants to protect his or her savings against the high costs of long-term care should consider purchasing LTCI.

One troubling misconception that stuck on people’s mind is that long-term care is barely needed or it won’t be needed at all. Most people are also hesitant to plan for their long-term care for the belief that there are alternatives in everything. It’s only when they realize the benefits of LTCI when they learn that their health insurance or Medicaid only covers the first few weeks in the chosen facility.

Long-term care can be needed by anyone of no matter what age or health. At any given moment, the long-term care landscape in America can change: Anyone between the ages 18 and 1044 may need this type of care, however, the elderly do comprise most of nursing beds.

The verdict goes to the uninsured. They run the risk of losing their lifetime assets for a year of stay in long-term care facility. The adversities may come in between as your children and heirs will be ones to suffer your worst financial mistake. So the best way to dodge those unlikely events is by securing yourself with long-term care insurance.

How much does it cost?

There is no one-size-fits-all policy. The policy normally depends on the person’s age, health, and residence.

People with good health history can save from the premiums compared to those with medical records. For instance, a person with Alzheimer and other chronic illness will need more care and so the policy should cost higher. The price also varies from state to state. The rates in metropolitan areas are obviously higher than the rural counterparts

Older policyholders receive much expensive premiums, but it is always more practical than paying out-of-pocket expenses.  People who thinks that LTC insurance is expensive don’t realize how much he or she will have to shell out from personal savings.

Who should not buy long-term care insurance?

• Those with no means of paying the coverage.
• Without assets to protect.
• Without family to pass their assets may need not apply for long-term care insurance.

Some people with chronic illness feel that they won’t qualify for coverage due to their health condition. However, the only way to find out if you are qualified is to apply and see if you still qualify. There’s no harm trying.

A single person with no family assumes he/she doesn’t need coverage, but if he/she owns assets and needs care, LTCI will be needed.

How much nursing home costs?

In 2008, the average cost of nursing home care nationally was $75,000 per year. The costs differ in the statewide level. A private room in a nursing home in some communities amounted up to $385 a day the same year.

The prices for nursing homes increase every year. So how could an uninsured retain his or her assets without LTC insurance? Not only the nursing homes are expensive but also the home care. The rates for home health aides rise every year, making it depressing for the uninsured to cover the costs from personal finances.

Does Medicare pay long term care?

Unfortunately, only a small portion of long-term care expenses will be covered by Medicaid. You have to reach the poverty level first before qualifying for coverage. You must have $2000 total assets, with no car, home, and personal resources.

Annuity With Long Term Care Benefits

A popular alternative to standard LTC insurance and refered to as a linked benefit product.

Are you looking for a way to leverage your investments to include protection from the risk of expensive long term care? Have you been turned down (declined) for long term care insurance or does you health prevent you from applying for long term care insurance?

If you answered yes may want to consider an alternative to spending down your own nest egg to pay for long term care.

There are two types of annuities with long term care benefits. One requires health underwriting and one does not. Both are single premium fixed annuities with a long term care rider designed to cover long term care expenses.

The annuity with no underwriting provides access to long term care benefits without depleting your principal, you avoid invasive medical questions, and you can pay for in-home care.

Both annuities will provide you with financial security and long term care peace of mind with extended care protection. The annuity with underwriting will have better leverage (benefits) than the annuity without underwriting, but if you cannot health-qualify your only choice is the annuity without underwriting.

How it Works

A Hybrid Annuity contract with a Long Term Care rider will typically have a maximum monthly benefit based upon the Account Value at the time of the first benefit claim payment.  The Account Value at that time will define the initial lifetime benefit amount for the Initial Benefit Rider (IBR).  The initial lifetime benefit amount for the Extended Benefit Rider (EBR) is typically a multiple of the IBR lifetime amount.

The maximum monthly (or daily) benefit amount is derived when the initial lifetime benefit amount is established by dividing the initial lifetime benefit amount (the account value) by the number of selected benefit periods for the IBR rider.  The maximum monthly (or daily) benefit amount for the EBR will be the same as that calculated for the IBR maximum.

The benefit period for the EBR is typically derived based upon the multiple associated with the selected EBR.  An example follows:

Account Value at the time of the first benefit claim payment = $150,000
IBR Benefit Period chosen                                                            24
IBR Lifetime Benefit                                                          = $150,000
300% EBR chosen                                                                
EBR Lifetime Benefit                                                         = $300,000

Maximum monthly benefit  =  $150,000 / 24 = $6,250
EBR Benefit Period derived = $300,000 / 6250                    =          48

As claim payments are made, the account value is reduced by the full amount of the payment.  If less than the maximum benefit amount is paid, then the benefit continues until the aggregate lifetime benefit amount is paid.

Once the Initial Benefit Amount is depleted, the Long Term Care benefits stop unless you had purchased the Extended Benefit Rider (EBR). This benefit initiates the Long Term Care insurance component.

These contracts also typically provide for cost of living or scheduled increases.